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1. China, Like the US, Faces Challenges in Achieving Inclusive Growth Through Manufacturing

Author:
Robert Z. Lawrence
Publication Date:
08-2019
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
For more than three decades the goal of becoming “the factory of the world” has been at the core of China’s development strategy. This strategy, in combination with high rates of domestic investment and low rates of consumption, made Chinese production the most manufacturing intensive in the world. But as its wages have risen, China’s competitiveness in the most labor-intensive manufacturing industries has eroded. Its ability to assemble products remains a major source of its exports, but it has also tried to shift toward more sophisticated value-added production domestically. Chinese domestic spending has shifted away from investment toward more consumption as citizens’ incomes have grown. Like Americans, Chinese people are also spending more on services than on manufactured goods. All these changes are fundamentally altering the structure of China’s production, reducing the role of manufacturing, and increasing the skill levels of workers in manufacturing. This Policy Brief reviews the challenges posed by these developments for China’s long-term goal of achieving more inclusive growth. It presents evidence that commonly held perceptions that Chinese manufacturing employment growth is robust are wrong. In fact, such growth has peaked and China is now following the pattern of structural change that is typical of a more mature emerging economy, in which the share of employment in manufacturing declines as workers are increasingly employed in services.
Topic:
Bilateral Relations, Economic growth, and Manufacturing
Political Geography:
China, Asia, North America, and United States of America

2. China, Like the US, Faces Challenges in Achieving Inclusive Growth Through Manufacturing

Author:
Robert Z. Lawrence
Publication Date:
08-2019
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
For more than three decades the goal of becoming “the factory of the world” has been at the core of China’s development strategy. This strategy, in combination with high rates of domestic investment and low rates of consumption, made Chinese production the most manufacturing intensive in the world. But as its wages have risen, China’s competitiveness in the most labor-intensive manufacturing industries has eroded. Its ability to assemble products remains a major source of its exports, but it has also tried to shift toward more sophisticated value-added production domestically. Chinese domestic spending has shifted away from investment toward more consumption as citizens’ incomes have grown. Like Americans, Chinese people are also spending more on services than on manufactured goods. All these changes are fundamentally altering the structure of China’s production, reducing the role of manufacturing, and increasing the skill levels of workers in manufacturing. This Policy Brief reviews the challenges posed by these developments for China’s long-term goal of achieving more inclusive growth. It presents evidence that commonly held perceptions that Chinese manufacturing employment growth is robust are wrong. In fact, such growth has peaked and China is now following the pattern of structural change that is typical of a more mature emerging economy, in which the share of employment in manufacturing declines as workers are increasingly employed in services.
Topic:
Economic growth, Manufacturing, and Trade
Political Geography:
China, Asia, North America, and United States of America

3. Five Reasons Why the Focus on Trade Deficits Is Misleading

Author:
Robert Z. Lawrence
Publication Date:
03-2018
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
President Trump has asserted that trade balances are a key measure of a nation’s commercial success and that large US trade deficits prove that past trade approaches have been flawed. But trade deficits are not in fact a good measure of how well a country is doing with respect to its trade policies. Many of the assumptions on which the administration’s beliefs rest are not supported by the evidence. This Policy Brief argues that trade deficits are not necessarily bad, do not necessarily cost jobs or reduce growth, and are not a measure of whether foreign trade policies or agreements with other countries are fair or unfair. Efforts to use trade policy and agreements to reduce either bilateral or overall trade deficits are also unlikely to produce the effects the administration claims they will and instead lead to friction with US trading partners, harming the people the policies claim to help
Topic:
International Political Economy
Political Geography:
Global Focus

4. Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account

Author:
Robert Z. Lawrence
Publication Date:
06-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Over the past decade, the US economy has been plagued by sluggish wage growth and rising income inequality. The debate over inequality in the 1980s and 1990s focused on the growing disparity between the earnings of skilled and unskilled workers and the earnings of the super-rich. Growing inequality between capital and labor income has now been added to these concerns. Remarkably, the growth in real GDP per worker over the decade of the 2000s, which averaged 1.7 percent annually, was actually more rapid than in the 1970s, 1980s, or 1990s, yet in the 2000s workers saw almost no increase in their take-home pay. Consistent with this gap between labor productivity and wage growth was a pronounced decline in the share of US national income earned by workers. As labor's share has declined, the share of capital has risen and has been especially concentrated in corporate profits. As profits are far less equally distributed than wages, this increase has contributed to rising income inequality. There are several plausible reasons for this development—globalization, automation, weak bargaining power of labor, political capture, higher markups—but the natural starting point for explaining factor income shares is the neoclassical theory of the functional distribution of income enumerated by John Hicks and Joan Robinson in the 1930s. In this framework there are two possible explanations for labor's recent declining share. The first is that capital and labor are gross substitutes, and the second is that capital and labor are gross complements. Several papers have explained the recent decline in labor's share in income by claiming that capital has been substituted for labor. Lawrence puts forward the alternative "gross complements" explanation for the declining US labor share. He shows that despite a rise in measured capital-labor ratios, labor-augmenting technical change in the United States has been sufficiently rapid that effective capital-labor ratios have actually fallen in the sectors and industries that account for the largest portion of the declining labor share in income since 1980. In combination with estimates that corroborate the consensus in the literature that the elasticity of substitution is less than 1, these declines in the effective capital-labor ratio can account for much of the recent fall in labor's share in US income at both the aggregate and industry level. Paradoxically, these results also suggest that increased capital formation, ideally achieved through a progressive consumption tax, would raise labor's share in income.
Topic:
Economics, Globalization, Markets, and Labor Issues
Political Geography:
United States

5. US Employment Deindustrialization: Insights from History and the International Experience

Author:
Robert Z. Lawrence and Lawrence Edwards
Publication Date:
10-2013
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Manufacturing is a key sector of the US economy. Although value added in manufacturing represented just 11.9 percent of GDP in 2012, manufacturing activity is strongly associated with economic growth, because manufacturing serves as the fulcrum of supply chains that combine and process raw materials and services to produce goods.1 In addition, the sector is among the most dynamic—accounting for about 70 percent of US spending on business research and development—and it regularly outstrips the rest of the economy in productivity growth. Over the long run, the contributions of US manufacturing to total output growth have been steady. Measured in 2005 dollars, for example, the share of manufacturing in US output was about the same in 2005 as in 1947.
Topic:
Economics, Emerging Markets, Industrial Policy, and International Trade and Finance
Political Geography:
United States

6. How Can Trade Policy Help America Compete?

Author:
Robert Z. Lawrence
Publication Date:
10-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
America deserves credit for not having succumbed to the global financial crisis by repeating the protectionist mistakes of the 1930s. Nonetheless, since 2007, although lip service has been paid to boosting US exports, its trade policy accomplishments have been modest. This is unfortunate because active trade policies can promote American living standards and facilitate America's return to full employment and sustained growth. These policies can also help to create a global trade order that advances American interests. This policy brief argues that the United States needs new initiatives that discipline foreign practices, increase access to foreign markets, revitalize the World Trade Organization (WTO), improve the administrative and regulatory environment for trade, and assist workers and communities adversely affected by change.
Topic:
Economics, Globalization, International Trade and Finance, Markets, Global Recession, Monetary Policy, and Financial Crisis
Political Geography:
United States and America

7. Manufacturing Globalization

Author:
Robert Z. Lawrence, Richard Katz, and Michael Spence
Publication Date:
11-2011
Content Type:
Journal Article
Journal:
Foreign Affairs
Institution:
Council on Foreign Relations
Abstract:
TROUBLE ON THE HOME FRONT Richard Katz A decade ago, the great American jobs train fell off its tracks. Traditionally, boosts in private-sector employment have accompanied recoveries from economic downturns. In the first seven years after the beginning of the 1980 and 1990 recessions, for example, the number of private-sector jobs increased by 14 percent. Yet in January 2008, seven years after the previous pre-recession peak and before the most recent recession began, private-sector jobs were up only four percent. Today, for the first time in the postwar era, there are fewer of these jobs than there were ten years before. Ignoring the overall dearth of jobs, Michael Spence (“The Impact of Globalization on Income and Unemployment,” July/August 2011) singles out the fraction of employment in sectors related to trade. He claims that China and other developing countries have taken U.S. jobs and blames globalization for the substantial increase in income inequality across the country. It is misleading, he says, to argue that “the most important forces operating on the structure of the U.S. economy are internal, not external.” He is wrong: the fault lies not in China or South Korea but at home.
Topic:
Globalization
Political Geography:
China, America, and South Korea

8. US Trade and Wages: The Misleading Implications of Conventional Trade Theory

Author:
Robert Z. Lawrence and Lawrence Edwards
Publication Date:
06-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Conventional trade theory, which combines the Heckscher-Ohlin theory and the Stolper-Samuelson theorem, implies that expanded trade between developed and developing countries will increase wage equality in the former. This theory is widely applied. It serves as the basis for estimating the impact of trade on wages using two-sector simulation models and the net factor content of trade. It leads naturally to the presumption that the rapid growth and declining relative prices of US manufactured imports from developing countries since the 1990s have been a powerful source of increased US wage inequality.
Topic:
Economics, Political Theory, and Labor Issues
Political Geography:
United States

9. Do Developed and Developing Countries Compete Head to Head in High Tech?

Author:
Robert Z. Lawrence and Lawrence Edwards
Publication Date:
06-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Concerns that growth in developing countries could worsen the US terms of trade and that increased US trade with developing countries will increase US wage inequality both implicitly reflect the assumption that goods produced in the United States and developing countries are close substitutes and that specialization is incomplete. In this paper we show on the contrary that there are distinctive patterns of international specialization and that developed and developing countries export fundamentally different products, especially those classified as high tech. Judged by export shares, the United States and developing countries specialize in quite different product categories that, for the most part, do not overlap. Moreover, even when exports are classified in the same category, there are large and systematic differences in unit values that suggest the products made by developed and developing countries are not very close substitutes—developed country products are far more sophisticated.
Topic:
Development, Emerging Markets, International Trade and Finance, Markets, Science and Technology, and Labor Issues
Political Geography:
United States

10. The United States and the WTO Dispute Settlement System

Author:
Robert Z. Lawrence
Publication Date:
03-2007
Content Type:
Working Paper
Institution:
Council on Foreign Relations
Abstract:
The United States likes to think of itself as a nation that abides by its treaties and commitments. Successive U.S. administrations have taken the obligations implied by international agreements seriously: They have opted out of parts of many agreements for fear that compliance would be contrary to U.S. interests, and have refused outright to sign some treaties on the grounds of potential legal exposure. But U.S. behavior toward the World Trade Organization is different; in this case, the United States has been quite willing to accept binding multilateral rules. Yet, the United States has also been repeatedly judged to be in violation of its WTO commitments by the organization's dispute settlement panels, and although some violations could be ascribed to uncertainties about the meaning of the rules, the United States is also guilty of disregarding the rules deliberately. Opinion in Congress sometimes encourages this behavior; legislators are less likely to question the legitimacy of U.S. conduct than to question the WTO's authority to pass judgment over the United States. Moreover, these tensions are likely to escalate if the Doha Round of global trade negotiations breaks down. If the diplomatic route to market access is blocked, trading partners will seek access to U.S. consumers by bringing more cases before the WTO's tribunals. A surge in such cases could increase resentment of the WTO in the United States, weakening America's commitment to its traditional postwar role as the bulwark of the international trading system. This would be unfortunate, because even without changes in the behavior of its trading partners, the rules of the WTO improve the performance of the U.S. economy.
Topic:
International Relations, International Trade and Finance, and Treaties and Agreements
Political Geography:
United States and America